Standard Chartered’s Nicholas Chia and Chong Hoon Park note that new Bank of Japan (BoJ) data show underlying inflation near or above target and a positive output gap, while USD/JPY testing 160 raises the risk of earlier rate hikes than their current Q3 baseline. They also highlight that market pricing for roughly two BoJ hikes by December has remained stable.

USD/JPY pressures BoJ policy timing

"USD/JPY testing 160 raises the risk of the BoJ hiking earlier than our Q3 call. But there is still a high hurdle for the BoJ to meet market expectations of two rate hikes in 2026."

"At face value, the new indicators imply the BoJ may be falling behind the curve given above-target inflation, a positive output gap and a still-accommodative policy stance, proxied by a benchmark rate (0.75%) below the neutral rate range."

"This could explain bear steepening in the 2Y/10Y Japanese government bond (JGB) spread since the outbreak of the war to reflect lingering inflation risks from higher fuel costs."

"This is in contrast to 2Y/10Y spreads mostly bear flattening in other developed markets as policy rate hikes get priced back in on the recent oil price shock."

"Market pricing of roughly two BoJ hikes by December has also been remarkably stable in March."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)